CAPITAL BUDJTING TECHNIQUE MCQS.

Question 1

A profitability index (PI) of .92 for a project means that __________.

the project's costs (cash outlay) are (is) less than the present value of the project's benefits

the project's NPV is greater than zero

the project's NPV is greater than 1

the project returns 92 cents in present value for each current dollar invested (cost)

Question 2.

The LMN Corporation is considering an investment that will cost $80,000 and have a useful life of 4
years. During the first 2 years, the net incremental after-tax cash flows are $25,000 per year and for the
last two years they are $20,000 per year. What is the payback period for this investment?

3.2 years.

3.5 years.

4.0 years.

Cannot be determined from this information.

 End of Question 2

Question 3.

Bulging Stomach Restaurants, Inc., has estimated that a proposed project's 8-year net cash benefit will
be $4,000 per year for years 1 through 8, with an additional terminal benefit of $8,000 at the end of the
eighth year. Assuming that these cash inflows satisfy exactly Bulging's required rate of return of 8
percent, the project's initial cash outflow is closest to which of the following four possible answers?

$27,309

$25,149

$14,851

$40,000

End of Question 3

Question 4.

Which of the following statements is incorrect regarding a normal project?

If the NPV of a project is greater than 0, then its PI will exceed 1.

If the IRR of a project is 8%, its NPV, using a discount rate, k, greater than 8%, will be less than 0.
 If the PI of a project equals 0, then the project's initial cash outflow equals the PV of its cash
flows.

If the IRR of a project is greater than the discount rate, k, then its PI will be greater than 1.

End of Question 4

Question 5.

Assume that a firm has accurately calculated the net cash flows relating to two mutually exclusive
investment proposals. If the net present value of both proposals exceed zero and the firm is not under
the constraint of capital rationing, then the firm should __________.

calculate the IRRs of these investments to be certain that the IRRs are greater than the cost of
capital

compare the profitability index of these investments to those of other possible investments

calculate the payback periods to make certain that the initial cash outlays can be recovered
within a appropriate period of time

accept the proposal that has the largest NPV since the goal of the firm is to maximize
shareholder wealth and, since the projects are mutually exclusive, we can only take one

End of Question 5
Question 6.

What do we call a formal comparison of the actual costs and benefits of a project with original
estimates?

Post-completion audit.

Feedback audit.

Cost-benefit analysis.

Business scorecard report.

End of Question 6

Question 7.

A project whose acceptance does not prevent or require the acceptance of one or more alternative
projects is referred to as __________.

a mutually exclusive project

an independent project

a dependent project

a contingent project
 End of Question 7

Question 8.

When operating under a single-period capital-rationing constraint, you may first want to try selecting
projects by descending order of their __________ in order to give yourself the best chance to select the
mix of projects that adds most to firm value.

profitability index (PI)

net present value (NPV)

internal rate of return (IRR)

payback period (PBP)

End of Question 8

Question 9.

Which of the following statements regarding cash flow patterns (for time periods 0, 1, 2, 3, and 4) is
correct?
 The sequence of -$100, $50, $40, $60, and $50 is a nonconventional cash flow pattern.

The sequence of -$100, $600, -$1,100, $600, and $20 has at most two internal rates of return.

The sequence of +$100, -$1,100, and $1,600 is a conventional cash flow pattern.

The sequence of -$50, $50, $70, $60, and -$150 has at most two internal rates of return.

End of Question 9

Question 10.

Which of the following statements is correct regarding the internal rate of return (IRR) method?

Each project has a unique internal rate of return.

As long as you are not dealing with mutually exclusive projects, capital rationing, or unusual
projects having multiple sign changes in the cash-flow stream, the internal rate of return method can be
used with reasonable confidence.

The internal rate of return does not consider the time value of money.

The internal rate of return is rarely used by firms today because of the ease at which net present
value is calculated.

End of Question 10
Question 11.

Which of the following is not a potential for a ranking problem between two mutually exclusive
projects?

The projects have unequal lives that differ by several years.

The costs of the two projects differ by nearly 30%.

The two projects have cash flow patterns that differ dramatically.

One of the mutually exclusive projects involves replacement while the other involves expansion.

End of Question 11

Question 12.

The discount rate associated with the single intersection of the NPV profiles of two mutually exclusive
projects represents __________.

Fisher's rate of intersection

 the rate at which the projects have identical profitability indexes

Gordon's rate of return

the minimum acceptable rate of return for each project

End of Question 12

Question 13.

An NPV profile for a single project __________.

displays Fisher's rate of intersection

is generally upward sloping

displays the expected NPV for a project at a variety of different discount rates

None of the above answers are

End of Question 13

Question 14.

A project whose acceptance precludes the acceptance of one or more alternative projects is referred to
as __________.
 a mutually exclusive project.

an independent project.

a dependent project.

a contingent project.

End of Question 14

Question 15.

Two mutually exclusive projects are being considered. Neither project will be repeated again in the
future after their current lives are complete. There exists a potential problem though -- the expected life
of the first project is one year and the expected life of the second project is three years. This has caused
the NPV and IRR methods to suggest different project preferences. What technique can be used to help
make a better decision in this scenario?

Rely on the NPV method and make your choice as it will tell you which one is best.

Use the common-life technique to replicate the one-year project three times and recalculate the
NPV and IRR for the one-year project.

Ignore the NPV technique and simply choose the highest IRR since managers are concerned
about maximizing returns.

In this situation, we need to rely on the profitability index (PI) method and choose the one with
the highest PI.
 End of Question 15

Question 16.

To the nearest dollar, what is the net present value of a replacement project whose cash flows are -
$104,000; $34,444; $39,877; $25,000; and $52,800 for years 0 through 4, respectively? The firm has
decided to assume that the appropriate cost of capital is 10% and the appropriate risk-free rate is 6%.

$15,115

$26,798

$33,346

$48,121

End of Question 16

Question 17.

A project has the following cash inflows $34,444; $39,877; $25,000; and $52,800 for years 1 through 4,
respectively. The initial cash outflow is $104,000. Which of the following four statements is correct
concerning the project internal rate of return (IRR)?
 The IRR is less than 10%.

The IRR is greater than or equal to 10%, but less than 14%.

The IRR is greater than or equal to 14%, but less than 18%.

The IRR is greater than or equal to 18%.

End of Question 17

Question 18.

You must decide between two mutually exclusive projects. Project A has cash flows of -$10,000; $5,000;
$5,000; and $5,000; for years 0 through 3, respectively. Project B has cash flows of -$20,000; $10,000;
$10,000; and $10,000; for years 0 through 3, respectively. The firm has decided to assume that the
appropriate cost of capital is 10% for both projects. Which project should be chosen? Why?

A; Project A's NPV > Project B's NPV.

A or B; Makes no difference which you choose because the IRR for A is identical to the IRR for B
and both IRRs are greater than 10 percent, the cost of capital.

B; Project B's NPV > Project A's NPV.

Neither A nor B; The NPVs of both projects are negative.

 End of Question 18

Question 19.

There are two mutually exclusive projects that have different lives. Project A has a 4-year life and Project
B has a 5-year life. In replacement chain analysis, the earliest common life will occur when Project A is
replicated __________ times and Project B is replicated __________ times.

5; 4

4; 5

20; 20

It is not possible to determine the answers for this problem.

End of Question 19

Question 20.

A project whose acceptance requires the acceptance of one or more alternative projects is referred to as
__________..

a mutually exclusive project

an independent project
 a dependent project

None of the above are

End of Question 20

Question 21.

Utilize the following NPV sensitivity analysis table to answer the question below:

Variable changeP SV PP

-10% -20 28 36

-5% 3 29 33

Base 30 30 30

5% 61 31 27

10% 103 32 24

NPV is most sensitive to a change in which of the three input variables -- product price (P), salvage value
(SV), or purchase price of the asset (PP)?

"P"

"SV"

"PP"

There is not enough information available to accurately answer the question.

 End of Question 21

Answers. D, B, A, C, D, A, B, A, D, B, D, A, C, A, A, A, C, C, A, C, A